Question

Assume that the central bank of nation decides to lower the reserve requirement for commercial banks. All other things equal, one can predict that this action will (Click to select the amount of required reserves. (Click to select)y excess reserves. (Click to select the amount of loans generated by commercial banks. Click to select the economy wide money supply, and finally [Click to select) Interest rates in that nation decrease increase not change

Answer 1

Answer: The Central Bank of nation decides to lower the reserve requirement for Commercial Banks. In this regard please note the following:

a) Reserve requirement means it is the amount of cash a bank must maintain in order to meet the requirement of its registered customers who have deposited their money in their bank account. It is a percentage (%) of the said deposits which is to be maintained by the Commercial Banks as per direction of the Central Bank in order to meet the requirement of cash withdrawal by its customer.   

b) Lower the reserve requirement means the percentage (%) as mentioned at a) will be lowered which in turn have following impact.

- Maintenance of low required cash amount than earlier. Hence, the amount of reserve will increase.

- Due to more reserve the bank can lend more money. Hence, there will be a wide money supply.  

- Since there will be a wide supply of money, interest in that nation will decrease.

- Since interest will get reduced, borrowing by the customer will increase. Hence, the amount of loan generated by the commercial bank will increase.

From the above it can be concluded that when Central Bank of nation decides to lower the reserve requirement one can predict that this action will decrease the amount of required reserves, increases the excess reserve, increases the amount of loans generated by the commercial bank, increases the economy wide money supply and finally decreases interest rates in that nation.